Some Ticket Pricing Puzzles

Some Ticket Pricing Puzzles

Marc Law and Jason Clemens

Economics is sometimes defined as the science of choice. The most basic assumption in economics is that individuals are “rational utility maximizers.” That is, they will do the best they can, given the scarce resources at their disposal, to achieve the highest feasible level of happiness. Given this assumption, economists generally do not look favourably on explanations for economic phenomena that assume that people behave irrationally.

A central challenge of econo--mics, therefore, is to explain why people do the things they do. A good economic explanation involves showing why consumers' choices are perfectly consistent with rational utility maximization (or profit maximization on the part of firms). “Good economics” should not require the analyst to assume that people are behaving irrationally.

To illustrate good economics at work, we will examine some ticket pricing practices which, on the surface, appear to be irrational. Using “good economic logic,” we will offer some possible explanations for why these practices may in fact be perfectly rational. Our explanations are by no means definitive. However, they do illustrate the power of the economic approach.

Puzzle #1: Why don't rock bands raise the price?

Popular rock bands are often able to sell all their tickets well in advance of their forthcoming concert. Indeed, advance ticket sales are often associated with long line--ups, and many frustrated fans are unable to purchase tickets. This has led some analysts to suggest that rock bands have “under--priced” their tickets. If many consumers are unable to get tickets at present prices, then, presumably, the rock band could raise its prices by some margin and still sell all the seats. Doing so would enable the rock band to increase its profits. The fact that rock bands do not do this therefore appears to be inconsistent with rational profit maximization.

Or is it? One explanation for the reluctance of rock bands to simply raise ticket prices is that they want to generate “excess demand” for their seats. Low prices encourage concert goers to line--up in advance of ticket sales. Large line--ups may be desirable from the rock band's perspective because it is a form of cheap advertising. By charging less for tickets, the rock band is able to reduce its advertising costs. This is potentially consistent with profit maximization.


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Charging less for tickets leaves fans more money to spend on ... other items ...


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Another plausible explanation is offered by the economist Steven Landsburg. Landsburg suggests that by under--pricing concert tickets, the rock band is able to induce fans to spend more on recordings, T--shirts, and other memorabilia.1 Charging less for tickets leaves fans more money to spend on the other items the rock band sells. Jointly maximizing profits from the sales of both tickets and other items may be more lucrative than simply maximizing profits from ticket sales if concert tickets and memorabilia items are complementary goods.2 This explanation can account for the under--pricing of concert tickets as well as the joint marketing of tickets and related products that usually occurs with these events (i.e., CDs, T--shirts, and other rock band memorabilia are often sold during the concert or near the ticket office).

Puzzle #2: Why are better seats “under--priced?”

Some years ago, the economist Steven Cheung examined movie ticket pricing in Hong Kong.1 Cheung was puzzled that the better theatre seats tended to be under--priced. As in the previous case, theatre owners could possibly raise the price on the better seats and sell all of them, but for some reason choose not to do so. The result is that there is an excess demand for better seats, a line--up develops, and these seats get filled up more quickly than the cheaper seats. Assuming profit maximization on the part of the theatre owners, this seems an irrational pricing policy. Why would the theatre owners deliberately under--price these better seats when they could increase profits by raising the price?

Cheung offers a rational explanation. He suggests that theatre owners might sensibly choose to under--price better seats in order to reduce their policing costs. If there were not a line--up for the better seats, and if these seats were not sold quickly, theatre patrons who purchase cheaper seats would have an incentive to move to the more expensive seats once the movie starts. By ensuring that these better seats are sold first, theatre owners are able to force theatre patrons to self--police the allocation of seats. As a result, there is no need for the theatre owners to hire someone to make sure that everyone sits in their assigned spot. Hence, under--pricing the better seats is consistent with profit maximization, once we consider all the costs involved in running a movie theatre.

Puzzle #3: Why do tourists buy the best seats?

A final ticket puzzle pertains to the quality distribution of theatre tickets. It is often observed that tickets for the best theatre seats are bought by those consumers who have to travel farthest to get to the theatre. For instance, tourists frequently purchase the most expensive theatre seats, while locals tend to purchase less expensive seats. This seems to be irrational.

In our opinion, it is not. Consider the following explanation. Because of travel costs, the risk of getting a poor seat is potentially more costly to tourists than to locals. Since the distribution of theatre seats by quality is uncertain, risk--averse tourists have a greater incentive to “insure” themselves against getting a poor seat by purchasing more expensive tickets. Hence, tourists will tend to buy better theatre tickets because they have more to lose by getting low quality seating.


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... if there are two qualities of a particular good, the better quality version tends to gets exported, while the lower quality version tends to be consumed locally.


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Another explanation, and one that does not require us to assume risk aversion on the part of theatre goers, takes its departure from the “shipping the good apples out” thesis. Some years ago, UCLA economists Armen Alchian and William Allen observed that higher quality goods tend to get “shipped--out.”2 Alchian and Allen noted that, if there are two qualities of a particular good, the better quality version tends to gets exported, while the lower quality version tends to be consumed locally. To explain this phenomenon, they offered the following example. Suppose there are high quality BC apples and low quality BC apples. In BC, high quality apples cost $4 per kilogram and low quality apples cost $2 per kilogram. Hence, the ratio of high to low quality apple prices is 2 in BC. Assume that it costs $2 per kilogram to ship apples from BC to Ontario. In a competitive market, the price of high and low quality apples (respectively) in Ontario will therefore be $6 and $4; and the ratio of high to low quality apple prices falls to 1.5 in Ontario. Since high quality apples are now relatively cheaper in Ontario than in BC, we expect Ontario consumers to purchase relatively more of the higher quality apple than BC consumers. Higher quality apples therefore tend to get “shipped--out” of BC and into Ontario.

Now let us consider this example in the context of theatre tickets. Higher quality theatre seats are relatively cheaper to tourists than to locals. This is because the ratio of the effective price (i.e., the price of the ticket plus transportation costs) of high quality seats to lower quality seats is smaller for tourists (who, by assumption, must travel farther to go to the theatre) than for locals. Hence, we expect that higher quality theatre seats will be purchased disproportionately by people from farther away.

The “Alchian and Allen Thesis” appears to be consistent with the empirical evidence as well as casual observation. The most expensive car stereo systems are usually installed in the most expensive cars. Cigarettes tend to be made of better grades of tobacco as excise taxes increase. Using data from purchases to Clemson University home football games, economists Eric Bertonazzi, Michael Maloney, and Robert McCormick show statistically that better stadium seats were purchased by sports fans who had to travel the farthest.1 Hence, sound economics can explain a number of phenomena which might otherwise remain puzzling to us.